Erdogan says rate hike was bitter but necessary for Turkey

Turkey's Already Struggling Economy Faces More Headwind due to COVID-19

This followed the appointment of the market-friendly former finance minister Naci Agbal as the new central bank governor on November 7.

The sudden shakeup sparked a market rally and turned Thursday's rate decision into a test of how reform-minded and independent the new team will be.

Turkey's central bank raised rates sharply following the first monetary policy meeting chaired by the new governor, one day after the country's president opposed tighter policy. Next key resistance for the Lira is seen around the 5.6 region.

Turkey is also running a serious current-account deficit - expected to be as much as $2.7 billion in September. Turkey's currency is still down 22 per cent since the end of previous year.

The increase, which was in line with the expectations of economists surveyed by Bloomberg, takes the one-week repo rate to slightly higher than the average interest rate that the central bank had been charging to supply funding to the Turkish financial system in recent weeks.

The ongoing currency collapse had heightened concerns about a payment crisis in the country because Turkish companies and the state are heavily indebted in foreign currencies.

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Erdogan is known as a staunch opponent of raising interest rates, branding such monetary policy as "the mother and father of all evil". "Accordingly, the committee made a decision to undertake a clear and strong monetary policy tightening in order to remove the risks to the inflation outlook, control inflation expectations and restore the disinflation process as soon as possible".

"Tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved", the statement indicated, adding that "the CBRT will attain its main objective of achieving and maintaining price stability by adopting transparency, predictability and accountability principles".

"The lagged effects of depreciation in Turkish lira, increasing worldwide food prices and deterioration in inflation expectations affect the inflation outlook adversely", the central bank noted.

However, these were not enough to contain the inflation rate, which at an annual rate of 11.89 percent in October is well above the actual target of five percent, or to reassure worldwide investors.

Turkey has announced its biggest interest rate rise in more than two years as it signalled a change of direction after a drastic shake-up in the country's economic management. He also wants to focus on growth, exports and employment.

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